It is also investing heavily to help start-ups developing battery and biofuel technologies, and is offering an annual $1 million prize to innovators in the field, almost on par with winning a Nobel.
"The intent is to make Israel a power center that has knowledge and industry in the field, and from there to serve as a catalyst for the rest of the world in making the switch," said Eyal Rosner, pointman for the project in Prime Minister Benjamin Netanyahu's office.
The program, the Fuel Choices Initiative, has a 10-year budget of 1.5 billion shekels ($430 million).
Switching from oil will bring consumer savings and tax income that, together with environmental benefits, will add more than a percentage point to gross domestic product, Rosner said.
No single fuel will replace oil. The government will draft regulation and help with tax benefits and infrastructure, but says it is up to the market to decide which succeeds.
The next five years will be dominated by compressed natural gas (CNG) and natural-gas based methanol, Rosner forecast, with battery and biofuel technology penetrating the market as technologies improve.
"Israel is certainly showing some great will, and certainly this is a very ambitious target to be achieved in a bit more than a decade," said Francois Cuenot, a transport and energy analyst at the Paris-based International Energy Agency.
Israeli officials are confident – two of the world's largest offshore gas fields, Tamar and Leviathan, were recently discovered in Israeli waters. With combined estimates of 810 billion cubic meters (bcm), the fields turned import-dependent Israel into a potential energy exporter.
In a best case scenario, 70 to 90 bcm of the reserves will be used in transportation in the coming decades. Gas, like oil, is a fossil fuel, but it burns cleaner.
Delek Israel, a unit of conglomerate Delek Group that owns and operates 250 gas stations, will complete Israel's first CNG station in 10 months. It signed this month a seven-year deal to buy $105 million worth of natural gas from the Tamar field.
"In the next five years there will be at least 40 CNG stations in the Israeli market," said chief executive Avi Ben Assayag. The cost of each station can reach $1 million, and he expects Delek to keep its market share of about a third.
CNG, he said, makes the most sense for heavy vehicles and will cost about half of what is paid for diesel or gasoline.
Delek signed a deal with Italy's NGV Motori, an industry leader, to help convert Israeli fleets to CNG engines. A single truck costs 15,000 euros ($20,600) to switch, he said.
In a separate pilot at a small filling station in the northern port of Haifa, about a dozen cars have been running for months on various mixtures of gasoline diluted with methanol. The idea is to reduce costs and pollution.
Some of the cars are powered by a blend called M15, which contains 15 percent methanol, already used widely in China. Others run on a more concentrated M70, which pilot manager Yossi Antverg said has never been tried before.
Optimistic about the results, Dor Chemicals, which has spent $2 million on the pilot, plans to build a $700 million plant that, according to the Dor Group website, will be able to produce a million tons of methanol a year. The facility will be the first of its kind in Israel.
Start-up NewCO2fuel, one of over a dozen being promoted in the government initiative, is developing a technique to turn the common greenhouse gas carbon dioxide into a useful fuel gas mixture called syngas. Among other things, syngas can be made into methanol.
Their chemical reactor receives sunlight reflected by a large mirror that is concentrated at a temperature of 1,000 degrees Celsius (1,830 F). That is hot enough to create syngas.
The two-year-old energy firm, half owned by Australia's Greenearth Energy and Erdi Fuels, plans to sell systems that would be built beside factories or power stations to collect carbon dioxide emissions and turn them into fuel.
CEO David Banitt said the company plans to begin in two years a $50 million pilot in Australia. The technology, he said, will be commercial in about four years.